Wal-Mart faces big fines amid bribery charges

NEW YORK – Allegations that Wal-Mart Stores Inc. covered up the findings of an internal probe that proved its Mexican subsidiary bribed officials in that country could have huge implications for the world's biggest retailer and its executives.

The alleged bribery scheme was revealed by The New York Times, which reported that Wal-Mart failed to notify law enforcement after the company's investigators found evidence of millions of dollars in bribes given to Mexican officials in exchange for getting building permits faster and other favors to help it aggressively expand in the region.

Two Democratic U.S. congressmen Elijah Cummings and Henry Waxman said on Monday that they were launching an investigation into the matter, and they sent a letter to CEO Mike Duke asking for a meeting. And The Washington Post reported late Monday that the U.S. Department of Justice has been conducting a criminal probe of the allegations since December, citing people familiar with the matter.

If Wal-Mart is found to have violated the Foreign Corrupt Practices Act, which forbids paying bribes to foreign officials, the company could face fines of hundreds of millions of dollars. Top Wal-Mart executives could lose their jobs — or worse, go to jail. And the retailer could suffer a public relations nightmare if a lengthy investigation ensues.

"Unlike prior bad PR stories in recent years, this will be a material distraction for Wal-Mart on multiple fronts," said Charles Grom, a retail analyst at Deutsche Bank.

The Times reported on Saturday that a former company executive in 2005 told Wal-Mart top brass about a bribery campaign that was used to help the retailer expand in Mexico. The paper said Wal-Mart officials launched an investigation into its Wal-Mart de Mexico subsidiary, but shut down the probe despite a report by its lead investigator that Mexican and U.S. laws likely were violated.

In December, Wal-Mart said in a filing with the Securities and Exchange Commission that it had begun an investigation into an overseas operation related to its compliance with the foreign corrupt practices law. Over the weekend, the company revealed that it had met with officials from the SEC and the Justice Department to discuss the company's ongoing investigation. But, according to the Times, Wal-Mart only did so after being informed that the paper was looking into the allegations.

"We are committed to getting to the bottom of this matter," Dave Tovar, a Wal-Mart spokesman, said in a statement.

The Justice Department and the SEC declined to comment for this story. But legal experts say if there is a government investigation into the bribery allegations, the results could vary widely. In recent probes into corporations — and their executives — the penalties for violating the foreign corruption law have ranged from big fines for the companies to jail time for the executives.

In February, for instance, Albert "Jack" Stanley, a former KBR Inc. CEO got a 2.5-year prison sentence for his role in a scheme to bribe Nigerian government officials in return for $6 billion in engineering and construction contracts. KBR, an engineering and construction firm, was a Halliburton subsidiary at the time of the bribes.

And in March, medical device maker Biomet Inc. agreed to pay $22.7 million to settle U.S. criminal and civil allegations that it bribed government-employed doctors in Argentina, Brazil and China for more than eight years to win business with hospitals.

Experts say a government probe into Wal-Mart's alleged bribery campaign would look at whether the company had adequate controls in place to prevent bribery, whether there was adequate training to discourage the practice before the violations occurred, and how high up any alleged cover-up took place.

If the government finds that Wal-Mart or its executives were negligent, the company could face fines and top executives could lose their jobs. But if it's determined that there was a cover-up that involved actions such as falsifying records, there could be criminal charges.

Eduardo Castro-Wright, who was head of Wal-Mart de Mexico at the time of the alleged bribes and, could face criminal charges, experts say. According to the New York Times, he was the driving force behind the bribery.

Duke, Wal-Mart's CEO who was over the company's international division at the time of the investigation, could also face intense scrutiny, experts say. As could H. Lee Scott Jr., who was CEO at the time of the allegations and remains on Wal-Mart's board.

According to the Times story, Scott rebuked internal investigators at one meeting for being overly aggressive. Shortly after, according to the paper, the company turned over the investigation to the general counsel for Wal-Mart de Mexico, who himself was alleged to have authorized bribes. He exonerated his fellow executives, according to the Times story.

Kevin Abikoff, chairman of the anti-corruption and internal investigations practice group at law firm Hughes Hubbard & Reed, said that the government will decide whether to file criminal charges against the company and its executives based on whether they tried to cover-up the allegations, including destruction of records or accounting irregularities.

Abikoff said the government is usually more lenient when a company discloses wrong-doing rather than when it tries to cover up the violations.

"The government can't tolerate that behavior," he said. "It's usually the cover-up that kills."

Either way, the allegations could be a headache for Wal-Mart. It comes at a time when the Bentonville, Ark.-based company has been focused on expanding internationally as sales have slowed in the U.S.

Wal-Mart's international business, which had a 15.2 percent increase last year, has had the fastest growth compared to its Wal-Mart U.S. business and Sam's Club division. In particular, Mexico, which it entered in 1991, has been a strong market: Wal-Mart de Mexico is now Wal-Mart's largest subsidiary, and one out of every five Wal-Mart stores is now in Mexico.

If there is a lengthy government investigation, it could increase the monitoring of its businesses in other regions like China and Brazil, which could hamper its international growth. Additionally, any penalties would be a financial pain for Wal-Mart, which recently reversed more than two years of sales declines at its namesake U.S. business.

"This is going to be a major distraction for Wal-Mart," said Leonard Baynes, professor at business law at St. John's University.